Seven Rights Of Creditors Of A Trust Settlor

Among people and families who take the time to craft an estate plan involving a trust, there is a relatively common misconception that this trust provides protection from the claims of creditors. When the trust is a revocable or living trust, however, any creditor protection is minimal. Debts that are owed to creditors of the creator, or settlor of the trust, may need to be paid out of the assets in the trust.

Seven Rights of Creditors Pursuing Claims Against a Settlor

When a creditor wants to involve the court in order to collect on a debt that was owed by the settlor, certain procedural steps must be followed. Trustees and beneficiaries should understand the following when a creditor goes to court seeking payment of a debt:

  1. If the settlor owes a creditor money and the settlor has the power to revoke the trust—either in whole or in part—the creditor can make a claim against the property while the settlor is still living.
  2. The claim that is made by the creditor can be for the maximum amount of trust funds available to the settlor under the terms of the trust.
  3. If the settlor has died, the creditor must first look to the settlor’s probate estate for repayment.
  4. If there is not enough money in the probate estate of the settlor to pay the creditor back, the creditor must file a claim.
  5. If the court allows the claim, the debt may be paid from the property in the trust.
  6. If there is no probate administration started, the creditor can file a petition to open the probate estate.
  7. If the trustee of the trust has filed and published a Notice to Creditors and that notice was sent to creditors that the trustee does or should know about, the claim must be filed within four months after the publication of the Notice. Or, in the alternative, it must be filed within 30 days after the Notice is mailed or personally delivered to the creditor, whichever is later.

To learn more about the procedure involved with creditor claims, we encourage you to view our article, “Trust Administration Creditors Claim Procedure.”

We hope that you have learned more about the rights of creditors of the settlor during the administration of a trust. If so, we encourage you to share this article with your friends and family on Facebook.

Scott Grossman

Scott Grossman

Attorney

The Grossman Law Firm, APC · 525 B Street, Suite 1500, San Diego, CA 92101 · (951) 523-8307

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